Climate Change, CSR and Sustainability, Government, Policy and Reform, Strategy

Can business help policymakers crack the COP conundrum?

The COP meeting failed again to reach agreement on rules to govern the global carbon market.

Applying a political economy lens to the COP process suggests that agreeing international rules is but the first of many challenges to address if carbon trading is to operate effectively.

However, the experience and expertise that the corporate sector has developed in relation to carbon offset projects could add much to addressing these in-country challenges, argues Dr Peter Stanbury

December’s COP meeting in Madrid ended without a crucial agreement on the global carbon market rules of the Paris Agreement.

Specifically, the problem related to a failure to agree mechanisms to implement Article 6 of the Paris Agreement.

For the uninitiated, Article 6 refers to the cooperative mechanisms under which change mitigation activities can be implemented in one country and the resulting emission reductions can be transferred to another country and counted towards its nationally determined contribution (NDC).

Article 6.4 of the 2016 agreement promised that the COP would adopt rules, processes and procedures to ‘ensure that both design and implementation of climate change mitigation activities as well as the verification of the emission reductions achieved meet standardised requirements.’

COP has yet to agree what these rules should be and failed again to do so in Madrid.

It is quite right to focus on the need for the trading system to be credible and transparent. In Madrid the main bone of contention was the issue of double counting – the risk that the country with the carbon credit could both sell it on and claim it against its own carbon reduction targets.

Frustration that agreement was not reached in Madrid, but hopes were expressed that the groundwork had been set for agreement at the next meeting in Glasgow next year.

However, looking under the bonnet of the trading regime from the perspective of political economy suggests that a great deal more, and more granular effort will be needed to make the carbon credit trading process sufficiently robust to be credible.

As other articles we have authored have explained, political economy analysis is a tool to understand the power dynamics within a country, or between nations. It looks at the details of where power lies, how decisions are actually made, and how things really happen.

When viewed through this lens, the real challenges to a process to verify emissions reductions lie at national and local, not international level. One of the great hopes of a carbon trading market was that it would allow emerging economies to acquire funding to support them in low-carbon growth.

By developing projects which generate carbon credits that can be sold to developed countries, so the argument went, countries in Africa, small island states and others could simultaneously grow their economies and be environmentally sound.

This means therefore that the success of the global carbon trading market will depend to a considerable degree on the political economy of some of the world’s more challenging locations. There are four key issues that will require detailed, country-by country, location-by-location analysis to address:

  • Corruption
  • Capability
  • Compliance
  • Consequences

Corruption

The unfortunate reality is that many of the developing economies in which carbon credit programmes will be developed have chronic problems with corruption. A hard-hitting report by the Environmental Defense Fund (EDF) in 2017 found widespread corruption relating to Brazil’s claims for carbon credits for dam construction projects on the Amazon.

In the view of the EDF, the situation raises ‘fundamental questions about the future of the CDM’ (Clean Development Mechanism – the structure created at Kyoto to promote clean development in developing economies so that carbon credits can be created). To be robust, the carbon market needs to understand, in each country, how corruption may compromise the genuineness of the carbon benefits claimed.

Capability

Even if corruption can be avoided, many developing economies lack government capacity to be able to operate effectively. They frequently struggle even to provide public goods like healthcare and education, much less develop projects to generate carbon credits.

Private actors may bring efficiency to project development but will nevertheless be hindered by poor regulatory environments and inefficient government systems.

COP therefore needs to be able to evaluate whether projects seeking carbon credits will be developed as planned and managed as required.

Compliance

COP rightly stresses the need to verify that the carbon benefits of initiatives awarded credits. In many emerging economies, however, the infrastructure is so poor that the process of verification could be extremely difficult. Some initiatives could be verified remotely – a reforestation programme, for example, could probably be verified by satellite data.

Other developments however would require on-the-ground verification. The carbon market process therefore needs to factor this, and the cost of it, into its processes.

Consequences

Even if a project delivers the claimed carbon benefits, what are its social impacts? A regrettably frequent feature of countries moving out of low-income to lower-middle income status is that inequality spikes.

What this means is that the benefits of development are felt disproportionately by an elite few, rather than by the population as a whole. Mechanisms under Article 6.4 therefore need to include assessment of the social impacts of projects it monitors.

In the extreme, it is possible to image a carbon credit programme which delivers the claimed environmental benefits, but at significant human cost, for example a large reforestation process which adversely impacts on the needs of local people.

The challenge for the COP process is that each of these factors will vary significantly, not just by country, but also within countries. The reality of these issues will be driven by local dynamics – cultural, social, political, religious and other factors – which will be different in each location.

As such therefore, they cannot easily be governed by international treaties which seek to apply a standard model to all locations.

It is clear therefore that any arrangements under Article 6.4 will need to mandate the need for detailed political economy analysis at national, and even sub-national level to ensure that the types of issues discussed here are properly understood and addressed proactively. Failure to do so would beg two significant questions.

The first is whether carbon-related developments will genuinely take a new turn and provide paths to development that are equitable, or will they maintain the inequitable situation that has so often occurred in the past.

The second is whether the carbon credit process has real credibility: are the claimed reductions robustly verified in light of local realities, or lazily approved by a one size fits all cookie-cutter approach? COP needs to get this right.

However, the corporate sector has a key role to play in helping COP get things right at the country level. Over many years, companies have developed a range of blended finance carbon offset projects, many of which have had to deal with precisely the type of political economy challenges described above.

The best of these need to be celebrated and analysed in detail to understand how they work, and how they have overcome the in-country problems they faced. This will help us all better to understand HOW carbon solutions work in the real world.

This is a potentially hugely valuable resource for governments, COP and others trying to make the carbon market work effectively.

Drawing on this previous corporate experience, and combining that with a political economy approach has the potential to facilitate the development of a joined-up and progressive policy agenda, which supports business investment in both climate solutions and supply chain transformation.

Dr Peter Stanbury is Principal of The Frontier Practice (www.TheFrontierPractice.com) . He is an international development expert, with a particular focus on economic development of rural communities, and on linking local agriculture markets to national and international supply chains. He has recently completed a major evaluation of a project in Bangladesh which works with the highly-vulnerable ‘Chars’ communities in the north of the country. He also worked with the Government of Bangladesh to engage with large local and international companies to develop sustainable supply chains in products including maize, vegetables and fish. He has advised the World Bank on leveraging large-scale investments in fragile states so that they provide jobs and income to local people, with a particular focus on West Africa. 

He also has significant experience in advising on turning around the performance of vulnerable economies and communities. Recently, he led a project to understand how best to generate economic development in Zimbabwe following the end of the Mugabe regime, focusing specifically on the use of industrial and agricultural clusters. He also developed the post-Ebola economic development strategy for Sierra Leone.  https://thefrontierpractice.com/

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